Karshan and the Irish Food Industry

The landmark Supreme Court decision in a case involving the Irish Revenue Commissioners and Domino’s Pizza (Karshan) signalled the beginning of significant change for employers in the Irish food industry, especially those who engage in the “gig economy”. Our Employment & Benefits and Tax teams highlight recent updates that employers need to know to be both tax and legally compliant.

What you need to know

• Karshan decision: The Supreme Court decision in Karshan related solely to the tax treatment of individuals as either employees or self-employed contractors. However, the five-question framework devised by the court has been used by the courts, the WRC and the Labour Court to determine worker status for the purpose of realising employment rights.
• Revenue guidelines: Following the Supreme Court’s decision in Karshan, the Revenue Commissioners published a new Tax and Duty Manual entitled "Revenue Guidelines for Determining Employment Status for Taxation Purposes".
• Code of Practice: Separately, the Code of Practice on Determining Employment Status was published after a review by an interdepartmental group comprising the Department of Social Protection, the Revenue Commissioners and the Workplace Relations Commission.
• False reporting: It is a criminal offence for an employer to knowingly misclassify an employee as a self-employed contractor to the Revenue Commissioners and the Department of Social Protection.
• Disclosure opportunity: The Revenue Commissioners has announced a disclosure opportunity for employers to correct payroll tax issues for 2024 and 2025 arising from genuine classification errors, without the imposition of interest and penalty.

The case of The Revenue Commissioners v Karshan (Midlands) Ltd. t/a Domino’s Pizza[1] concerned the tax treatment of pizza delivery drivers and asked whether they were employees or independent contractors for tax purposes. The Supreme Court held that in order to discover whether a contract is either “of service” or “for service”, five questions should be asked:

1. Does the contract involve the exchange of wage or other remuneration for work?
2. If so, is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?
3. If so, does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?
4. If these three requirements are met the decision maker must then determine whether the terms of the contract between employer and worker interpreted in the light of the admissible factual matrix and having regard to the working arrangements between the parties as disclosed by the evidence, are consistent with a contract of employment, or with some other form of contract having regard, in particular, to whether the arrangements point to the putative employee working for themselves or for the putative employer.
5. Finally, it should be determined whether there is anything in the particular legislative regime under consideration that requires the court to adjust or supplement any of the foregoing.

While the Karshan decision relates solely to the tax treatment of individuals, the five-question framework has subsequently been used by the courts, the WRC and the Labour Court to determine worker status for the purpose of determining if employment law protection could be afforded to workers.

Many employers in the food sector rely on workers who are often classified as independent contractors. This may include delivery drivers (as was the case in Karshan), relief chefs or special event caterers. The Supreme Court’s decision in Karshan went beyond the wording of the workers’ contract. The five-question framework devised by the court should be used by employers in the food sector to ensure legal and tax compliance. When it comes to question three and the “control” factor, for example, employers might consider the following:

• Do you set your workers’ schedules?
• Do you dictate how they perform their duties?
• Do you provide tools, uniforms, etc?
• Are the workers promoting your brand or their own?

Learn more about the Karshan decision.

Revenue guidelines and Code of Practice

Following the Supreme Court’s decision in Karshan, the Revenue Commissioners published a new Tax and Duty Manual in May 2024 entitled: Revenue Guidelines for Determining Employment Status for Taxation Purposes. These guidelines provide a number of case studies aimed at assisting employers in determining what Karshan means for the taxation of their workers.

Subsequently, a Code of Practice on Determining Employment Status was published in October 2024, following a review by an interdepartmental group comprising the Department of Social Protection, the Revenue Commissioners and the Workplace Relations Commission. The Code discusses each limb of the Karshan test in detail and provides a non-prescriptive and non-exhaustive list of characteristics typical of an employee. It also separately sets out a list of characteristics typical of a self-employed contractor. The lists are outlined here:

Employees

• Are under the control of another person who directs them as to how, when and where the work is to be carried out
• Supply labour only
• Receive a fixed hourly/weekly/monthly wage
• Cannot subcontract the work
• Do not supply materials for the job
• Do not provide equipment other than the small tools of the trade
• Are not exposed to personal financial risk in carrying out the work
• Do not assume any responsibility for investment and management in the business
• Do not have the opportunity to profit from sound management in the scheduling of engagements or in the performance of tasks arising from the engagements
• Work set hours or a given number of hours per week or month
• Work for one person or for one business
• Receive expense payments to cover subsistence and/or travel expenses
• Are entitled to sick pay or extra pay for overtime

A number of important caveats are included in the Code under the above list of characteristics. These caveats include:

• If the work can be subcontracted and ‘paid on’ by the person subcontracting the work, it is possible the employer/employee relationship may simply be transferred on
• It is possible that the provision of tools or equipment will not have a significant bearing on the determination of employment status, having regard to all the circumstances of a particular case
• An individual could have considerable freedom and independence in carrying out work and still be an employee
• An individual with specialist knowledge might not be directed as to how the work is to be carried out and still be an employee
• An individual who is paid by commission, by share, or by piecework, or in some other atypical fashion may still be regarded as an employee
• Some individuals work for more than one employer at the same period of time, and may still be regarded as an employee
• Some individuals may also be self-employed for other work being performed by him or her, and may still be regarded as an employee of another business
• Some individuals work remotely or otherwise not on the business premises and are still regarded as employees
• Employees may work in a range of ways, including, but not limited to, part-time work, temporary work, seasonal work or occasional work
• Some employees are paid by reference to contracted hours, while others may be paid by reference to the amount of work actually done
• The hours of work or remuneration of an employee may be uncertain

Self-employed contractors

• Own their own business
• Are exposed to financial risk by having to bear the cost of making good any faulty or substandard work carried out
• Assume responsibility for the investment in and management of their work activities
• Have the opportunity to profit from sound management in the scheduling and performance of engagements and tasks
• Have control over what is done, how it is done, when and where it is done and whether they, or another person, does the work
• Are free to hire other people, on terms they specify, to do the work which has been agreed to be undertaken
• Can provide the same services to more than one person or business at the same time
• Provide the materials for the job
• Provide equipment and machinery necessary for the job, other than the small tools of the trade or equipment which in an overall context would not be an indicator of a person in business on their own account
• Have a fixed place of business where materials, equipment, etc. can be stored
• Costs and agrees a price for the job
• Provide their own insurance cover e.g., public liability cover, etc.
• Control the hours of work in fulfilling the job obligations.

Important caveats to this list include:

• The fact that an individual has registered for Income Tax or VAT under the principles of self-assessment does not automatically mean that he or she is self-employed
• A person who is a self-employed contractor in one job is not necessarily self-employed in another job. It is also possible to be employed and self-employed at the same time in different jobs

The Code dictates that these characteristics should be taken into account when answering the fourth question in the test. These factors should be considered by employers in the food industry when engaging workers.

The Code also discusses several special circumstances and developments in the labour market that might influence the employment status of a worker, including their PRSI classification.

Consequences for false reporting

It is a criminal offence for an employer to engage a worker as an employee under a contract of service, but who is knowingly recorded and reported to the Revenue Commissioners and the Department of Social Protection as if they were operating under a self-employed contract for services. The Code provides further information on so-called false/bogus self-employment. This is an important issue for businesses. Where a worker is an employee for tax and/or PRSI purposes, the employer must apply the pay as you earn (PAYE) withholding system on payments and benefits provided to that worker and a charge of Employer PRSI may occur. Underpayment of PAYE and PRSI can give rise to significant liabilities for employers.

Disclosure opportunity

Recently, the Revenue Commissioners announced that employers can correct payroll tax issues for 2024 and 2025 arising from bona fide classification errors, on a favourable tax basis and without imposition of interest and penalty. Employers who acted in good faith relying on case law and guidance available prior to the judgment in Karshan, and who misclassified employees as contractors as a result, have been encouraged to use this disclosure opportunity to correct their tax affairs. Where the conditions of the settlement opportunity are met, the liabilities arising should be calculated as follows:

• Income tax is calculated at the rate of 20% on the gross amount paid to the employee during the relevant year. The higher rate of 40% does not apply.
• Universal social charge (USC) is calculated based on a blended rate of 3.5% of the gross amount paid during the relevant year.
• The income tax and USC do not have to be calculated on a ‘grossed-up’ basis, which might otherwise apply. Where the worker has filed a tax return for 2024, a credit may be available for tax paid by them.
• PRSI (Employee and Employer contribution) must be calculated on an actual basis.

Disclosures must be submitted by 30 January 2026, and all liabilities must be paid in full. Where an employer fails to make a disclosure by this date - and liabilities from misclassification subsequently are discovered - tax, interest and penalties will be applied in full and grossing-up may apply.

Employers making a disclosure under the Revenue Commissioners settlement opportunity should consider the impact this will have for employment law purposes. This is because under the Code, each of the Department of Social Protection, the Revenue Commissioners and the Workplace Relations Commission apply the same tests to determine status, so employers claiming they made bona fide classification errors for tax will need to consider any potential impact on the workers’ status for employment law purposes.

Key takeaways for food industry

• Review your casual worker and contractor arrangements in light of the five-question framework set out in Karshan.
• Misclassifying a worker may lead to significant tax and PRSI liabilities. Avail of the Revenue’s disclosure opportunity to regularise your tax affairs, if appropriate.
• While the Karshan decision primarily concerned tax, the tests gave rise to the Code of Practice which will be relied on not just for tax and social welfare, but also for employment status for the purposes of employment claims. Mischaracterisation of an employee as a self-employed contractor can therefore also leave an employer vulnerable to employment rights claims.
• It is strongly recommended that employers in the food industry seek legal and tax advice to ensure compliance.

Comment

While the Karshan decision and subsequent developments represent significant change for the food industry, they also provide an opportunity for employers to ensure that they are legally compliant, to protect themselves from future liabilities and build a stable and robust workforce.

For specific advice as to how these changes might affect you, contact our Employment & Benefits or Tax teams.

[1] [2023] IESC 24.